Mortgage Loan- Quality Control Upfront

As usual I try to keep up with what is progressing within mortgage lending and keep you informed that Mortgage Underwriting - Quality Control is being implemented at upfront application time. Some of these changes are oh so good and in the best interest of the consumer. Of course, when you are applying for a loan, you want everything to fall in line without any loopholes. I am here to inform you; there will not be any loopholes if you do things the way they should be and keep yourself from making a mistake of what a friend or foe might tell you is okay to do. There is a right way and wrong way for everything and getting a mortgage loan is not exempt.

Most consumers who have not had problems with making their mortgage payments or having a property that is "underwater;" have complained about having to makes up the difference for some of the millions who have either lost their job; can't find a job, have a property which is worth less than they owe, or have a loan that they could not afford to begin with. I can see both sides of the story and there may be a third side also. But, with all the mortgage rules changing it is to protect and prevent further negligence and help promote sound lending practices. It is not bad actually; it is good for everyone.

The newest changes I have gained knowledge:

• It is now in place in the underwriting process that a verbal verification of employment must be obtained by the lender within 10 calendar days of closing for salaried and within 30 days for self-employed
• a new credit report must be pulled a second time within 24 hours of closing

This are two of the last changes I have found out about but in another post I have FHA has changed or is in the process of changing many things to include less seller contributions from 6% to 3%; making this more industry standard. They have changed the down payment for borrower's who have credit score below 580 to be 10% but you may find these significant and important change here and also here.

The reason why these change listed above are of value is simply the following.

Verbal VOE: If the unimaginable thing happens and someone gets laid off; the deal goes down. This sounds cold but if a person loses their job; the first few crucial months of this new payment can put them into foreclosure before they can think twice. There are many things which can happen at unexpected time with employment in the country as it is now. Unemployment has risen to 14% at points within the past few years. If there is less income or no income the loan cannot close. Most people are responsible enough to know that any major change in income, assets and debts should be reported as soon as they are known about and that they should not make new debts period. A lot of the times the DTI is at the brink of being over the guidelines anyway.

Credit Report Update: This is to eliminate the borrower who will go out after the credit report is initially pulled and buy new furniture; new car to go into the new garage and possibly borrower funds for closing of the loan. You may be saying that well this is getting picky. It is and this has been known to happen and then the applicant has increased their ability for the capacity of making the mortgage payment thereby making their debt to income ratios higher than approved at. ANY loan must be in the borrower's DTI ratio. People will do strange things and especially if they do not know not to. This is every Loan Officers nightmare.

It is always best to give accurate, full and truthful information upfront, rather than spending 30 days to get to closing and then you can't close the loan for reason or the other. If the approval changes because you have gained more debt; it is your fault, not the lender.

The pre-qual application process is the following:

• make application at a lender/broker/mortgage company
• 2 years of residency
• 2 years of employment history
• provide pay-stubs to cover one full month, W-2s for 2 years, and 1040 personal tax returns (if applicable) Self-employed individuals normally will present 2 yrs 1040's with all schedules. If it is a Corporation and the individual is paid by W-2; then pay-stubs and W-2's must also be presented. A 4506T must be signed and dated a application and then again at closing.
• provide a minimum of 2 months bank statements
• you should have at least five percent (5%) down-payment saved from your own funds for a Conventional Loan (this 5% cannot be gifted); three and one half percent (3.5%) for FHA (some of these funds may be gifted). There is no down-payment for a VA loan.
• current statements for retirement (401K) (IRA) etc, stock, or investment accounts to indicate the vested percentage
• all assets are listed on the application
• income is based upon the gross amount you receive each month; stability of the income is evaluated. Part-time income may be used if there is a history of receiving and it will continue. Overtime can be utilized if it is consistent and will continue which must be verified from the employer. Bonus income may be used if there is a history and continuation. Commission income is acceptable with a history and continuation. All income must be consistent and there must be a foreseeable future of receiving it. Child support payments may be used as income; if there is a divorce decree or property settlement statement indicating these payment and there is a history of receipt and continuation. A court order and child services report may also be used in verifying the income and receipt. Alimony has the same guidelines.
• credit report is pulled to verify credit history and verify all credit obligations (debts) an individual. It is the applicants responsibility to inform the Loan Officer is there are debts that are not on the credit report. (this affect your ability to repay the debt and it is in your favor to be honest and conclusive). Alimony and Child Support are considered credit obligations and must be included in the debt to income ratio.
• the loan officer will gather all information he needs to process your application and see if you qualify. Sometimes they can tell on the spot if your income, credit and debts fall into the category for preliminary approval. If all of the documentation is not consistent and complete you should know within a few days if you have a preliminary approval once they have verified all of the income, assets and credit.
• you should receive certain disclosures within (3) business days of application if you did not get a copy of these documents when you applied. They are: Good Faith Estimate, Truth-in-Lending and Servicing Disclosure.

The above is a synopsis of what is suppose to happen at application time. To sum it up, you must have debt to income ratios (DTI) that fall within guidelines of each investor. The bank uses the investor guidelines (Fannie Mae, Freddie Mac, FHA, VA). As a general rule the DTI should be no higher than 45% for Conventional (this will depend upon your assets, credit and the over all files; which is submitted into Desk Top Underwriter). The standard ratios are 27/36. The automated underwriting system will approve or not approved depending upon the entire credit risk of the file.

FHA guidelines are 28/41%, sometimes approving up to 43%; again depending upon the file and the FHA Scorecard finding. VA guidelines are 41% to 44% again depending upon the borrower's proved capacity to repay the debt. These are all flexible as stated due to the overall position of the loan file and they are just that; guidelines.

• down-payment (5%) and closing cost (should be around 3 to 5%) must come from borrower's own funds for conventional loans with the exception that the Seller may contribute up to (3%) for closing cost.
• down-payment of (3.5%) and closing cost may be gifted for FHA and VA loans. VA has no down-payment.